A company has included stock options as part of the manager's compensation packages. The current stock price of the company is $40. Each stock option gave the manager the option to buy a stock of the company at $45 two years later (If the manager exercise the option, the manager will pay $45 to buy the share of the company regardless of the market price two years later). Explain how this arrangement can benefit the shareholders of the company.

Sunlife Investment is trying to sell you a 6-year investment policy. If you decide to invest in this policy, you will need to pay $4,000 immediately, $6,000 at the end of year 2 and $8,000 at the end of year 4. The investment policy will then pay you $20,000 at the end of year 6. The interest rate that you require from such investment is 4.8 percent a year, compounded annually. Will you invest in this policy?

A)

Discuss if the following statement is true or false:

Since investing in junk bonds is very risky due to the low credit/bond rating associated with the bonds, no investor would want to invest in junk bonds.

1)

Today is the first day of the year. Randy is planning to take a two-year break from work and travel round the world. She hopes to be able is this at the end of four years from today. To prepare for this, she decided to deposit $10,000 at the beginning of each month (with the first deposit starting now), for the next four years. How much money will Randy have at the end of four years if she can earn an interest rate of 9.6 percent per year, compounded monthly on her savings?

2)

E-Coms has a new issue of preferred stock. The stock will pay a preferred dividend of $5 every year but the first dividend will not be paid until 5 years from today. If you require a return of 8 percent on this stock, how much will you pay for the stock now?

3)

Discuss if the following comment is true or false:

When deciding the coupon rate of a new issue (of fixed rate bonds), the company should always set the coupon rate to be less than the market interest rate. By doing that, the company will pay less interest every period.

4)

Paddy Field Limited has just paid a dividend of $1.50. Due to the current financial difficulties, Paddy Field will not be paying any dividend for the next year. Paddy Field is expected to resume paying an annual dividend of $1 in year 2 and this dividend is expected to increase by 6 percent annually thereafter.

What is the value of this stock in three years if the required return is 15 percent?